Active vs. Passive — My Funds vs. Vanguard Funds in Fees and Returns

Posted by Sun on December 19, 2006
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Early this month, I posted an entry on my mutual fund portfolio. I also mentioned in the post that all the mutual funds I have in the taxable account are actively managed funds. A reader asked me the question why I chose actively managed funds instead of index funds which, by common sense, have low expense ratio (ER), low turnover rate, and less distribution, yet the performance of my funds were quite good, at least for now.

At the very beginning when I started investing in mutual funds about 5 years ago, I didn't have a lot of money to invest and every Vanguard fund requires a minimum of $3,000 to open an account. This won't be a problem if I only invest in a couple of funds, but it was almost impossible if I want to truly diversify into different sectors/fund classes. Therefore, I had to look for other alternatives with lower initial requirements and not too high ER. Actually, for all the funds I own, the highest initial investment amount is $2,500 for Dodge & Cox funds (DODGX and DODFX). Most funds only need $1,000 to start investing with them and T. R. Price (PRSVX, PRNEX and TREMX) even waives the initial investment if using their automatic investment plan. By choosing the funds with low initial amounts, I can spread my investments into different categories, reducing the risk.

ERs and returns

So how do my funds compare with Vanguard's low-cost funds? I use my funds' investment style box to find their Vanguard counterparts (as close as possible) and compare their respective ER, yield, and 5-year return:

My fund	ER	Yield	5-yr return	Vanguard fund	ER	Yield	5-yr return
ADVDX	1.23	12.17	19.45(*)	VMVIX	N/A	N/A	N/A
BUFSX	1.01	N/A	12.64	VISGX	0.23	0.24	12.74
CGMFX	1.07	1.07	18.44	VPMCX	0.45	0.51	9.03
CSVFX	0.99	1.32	14.63(**)	VLACX	0.20	1.44	14.17(**)
DODGX	0.52	1.25	12.97	VIVAX	0.21	2.20	9.34
DODFX	0.70	0.80	20.47	VTRIX	0.50	1.27	17.14
OAKBX	0.89	1.24	10.11	VSMGX	0.25	2.44	7.69
PRSVX	0.84	0.38	17.62	NAESX	0.23	0.90	12.95
PRNEX	0.68	0.72	21.47	VGENX	0.28	1.11	27.88
TREMX	1.32	0.12	37.72	VEIEX	0.45	1.33	26.60
TAREX	1.14	1.14	23.13	VGSIX	0.21	3.56	23.75
TGLDX	1.59	N/A	38.77	VGPMX	0.40	0.82	35.90

Obviously, Vanguard lives up to its name of being the low-cost mutual funds powerhouse as all the funds I choose to compare with mine have sub-0.5% ER, making them difficult to beat in that category. In addition, the Vanguard funds also have higher yields than most of the funds I own. However, in terms of short-term returns (5-year), 7 out of 12 funds beat their Vanguard counterparts quite nicely.

Fees and values

Now I am trying to predict future performance based on the history. First I assume that the above ERs and 5-year returns remain the same for the next 5 years (not really a valid assumption, but it's the best I can have). If I invest $1,000 for each fund now, using the NASD Mutual Fund Expense Analyzer, the fees and returns of my funds and Vanguard funds five years later are:

My fund	5-yr value	5-yr fees	Vanguard fund	5-yr value	5-yr fees	Value difference	Expense difference
ADVDX	$2,287	$95	VMVIX
BUFSX	$1,724	$66	VISGX	$1,800	$15	-$76	+$51
CGMFX	$2,193	$92	VPMCX	$1,505	$28	+$688	+$64
CSVFX	$1,886	$66	VLACX	$1,920	$14	-$34	+$52
DODGX	$1,792	$35	VIVAX	$1,546	$13	+$426	+$22
DODFX	$2,450	$56	VTRIX	$2,157	$33	+$293	+$23
OAKBX	$1,548	$55	VSMGX	$1,430	16$	+$118	+$39
PRSVX	$2,158	$62	NAESX	$1,817	$15	+$341	+$47
PRNEX	$2,556	$56	VGENX	$3,372	$27	-$816	+$29
TREMX	$4,640	$155	VEIEX	$3,184	$39	+$1,456	+$116
TAREX	$2,674	$96	VGSIX	$2,871	$18	-$197	+$78
TGLDX	$4,755	$189	VGPMX	$4,543	$46	+$212	+$143

Except the first fund (ADVDX), after five years holding period, though I will pay $664 more in fees, I will have $2,421 more in total market value with my current funds than with Vanguard funds. For these extra returns, I am willing to pay that additional $664 fees. Actually, even Mr. Bogel, funder of Vanguard, admitted that the indexing movement isn't looking quite so triumphant these past few years as index mutual funds have taken less than a 7 percent share of assets in stock and bond mutual funds.

If considering that Vanguard charges $10 account maintenance for funds with $5,000 in market value, the difference in fees between my funds and Vanguard funds will be smaller.

Conclusions

Of course, the above comparison is based on the assumption that history holds for the future, which we all know may not be the case. Plus, five years is relatively short for mutual fund investing as numerous studies have shown that over long period of time (10 years, 20 years, or 50 years), the market is hard to beat if not impossible. As a matter of fact, four of five funds in my Roth IRA account are Vanguard index funds (VGTSX, VIPSX, VTSMX, VWELX) since I expect to hold them for 20, 30 years. However, if you only can set aside very small amount every month to invest in mutual and don't have that $3,000 to get into the doors of Vanguard funds, then you may want to choose some actively managed funds with lower initial investments (T. R. Price for instance) to begin investing right away. And once you have accumulated enough money to meet Vanguard's requirements, you can always switch to Vanguard for their low-cost offerings. The key is start investing now!

* 3-year return; ** 1-year return;

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12 Comments

January 19, 2007

have you ever pay tax on the cap gain distribution in your taxable account? how would tax play in your setup?

Posted by Meng

April 2, 2007

The key question is whether you’ve been in those funds for the entire 5 years. If you only started investing in a fund say in year 3, the first two years of its performance, however great or bad, are not applicable to you.

Posted by TFB

April 3, 2007

TFB: Out of the 12 funds I own, 9 were first purchased in early 2002. So it was a little short of 5 years, but quite long enough to make a comparison. However, since I made a small purchase every month, the return I have won’t match the fund’s total return.

Posted by The Sun

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